China to Tighten Rules on Five Financial Giants

Xinhua Financein The Wall Street Journal

2018-11-05 11:49

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China’s central bank is placing new regulations on the financial sector to tame runaway growth, beginning with five conglomerates including Ant Financial Services Group, as Beijing signals its resolve to curb risk even as economic growth slows.

Ant Financial, the world’s most valuable financial technology startup, retail and property giant Suning Commerce Group 002024 2.58% and three government-backed firms—China Merchants Group, Shanghai International Group and Beijing Financial Holdings Group—will face stricter capital-reserve requirements and risk-management rules under a pilot program, according to the official Xinhua News Agency.

The new rules are expected to be rolled out for all financial holding firms during the first half of 2019, Xinhua said, citing an official with the People’s Bank of China.

Beijing’s two-year campaign to tackle rising debt has slowed as the economy slumped to its weakest growth in a decade and as a trade dispute with the U.S. threatened to hurt Chinese exports. But policy makers appear determined to move ahead with reining in privately-owned financial behemoths that expanded aggressively in recent years. Analysts say they are concerned about ensuring stability in the broader economy and protecting the state-owned banking system.

The PBOC, in its annual China Financial Stability Report published Friday, said it aims to cool rampant growth of firms operating in at least two financial sectors, prevent systemic risks and clean up dubious activities that have harmed investors and exacerbated capital flight.

The central bank report criticized some nonfinancial firms for “blind entrance” to the financial industry and obtaining various licenses in banking, insurance, asset management and payments without employing senior executives with sufficient knowledge of finance.

“They obtained massive funds through this way and used part of the money to boost registered capital, while shuffling some other parts to group members or to support overseas expansions through related party transactions,” the report said.

The new rules will prevent the use of words like “finance” or “financial holding” in company names without regulatory approval. Firms will need to boost capital reserves and avoid putting the same capital pool to multiple uses, as well as meet new debt-to-asset ratio requirements. Neither the central bank nor Xinhua specified reserve and debt requirements. The Wall Street Journal previously reported that regulators aim to bring rules for conglomerates in line with those for commercial lenders.

Financial holding firms will also need to make their shareholding structures more transparent and avoid shuffling funds between units and transactions among related parties, the central bank report said.

Under a relatively lax regulatory environment over the past decade, a number of nonfinancial Chinese firms have waded into multiple financial sectors and achieved breakneck expansion because they weren’t subject to rules applying to traditional institutions like banks.

Some of them have already begun to scale back their ambitions. Beijing has pressured aviation and hotels giant HNA Group Co. to dispose assets including stakes in Chinese banks and trusts and Deutsche Bank. Authorities have seized control of privately-owned Anbang Insurance Group Co., and prosecuted a number of financial executives including former Anbang chairman Wu Xiaohui and Lai Xiaomin, former chairman of state-owned China Huarong Asset Management Co.

Financial regulators are also reining in business at the intersection of internet and finance, especially investment products that have attracted overwhelming numbers of ordinary investors.

Owned by Jack Ma, Ant Financial this year took steps to curb inflows to its giant money-market funds to address regulatory concerns. The fund has shrunk in size although it remains the world’s biggest of its kind. Ant’s microlending units have extended hundreds of billions of dollars in loans to small-business owners and individuals, but analysts expect their growth to slow as regulatory rules tighten.

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